Monday, April 30, 2012

The past week was the busiest week for dividends increases that I have noticed in my four and a half years as a dividend blogger. There were 66 companies which raised distributions. Apparently, no one bothered to inform these Board of Directors committees about the potential for steep increases in taxes on dividend income. I chose to highlight 25 of these companies that have been able to successfully raise dividends for over 5 years in a row. Corporations’ dividend policies are typically forward looking. Companies that announce dividend increases do so, only after a careful consideration of future economic and business factors, in order to make certain that it will be able to afford the increased payout. This vote of confidence shows that few corporate boardrooms consider the risk of increases in tax rates to be a big issue. This is also a vote of confidence in the business prospects for the next few years.

The companies which announced dividend increases over the past week included:

Johnson & Johnson (JNJ) engages in the research, development, manufacture, and sale of various products in the health care field worldwide. The company raised its quarterly dividend by 7% to 61 cents/share. This confirmed my prediction from early January, that the company will boost distributions to 61 cents/share. This marked the 50th consecutive annual dividend increase for this dividend king. Yield: 3.80% (analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. The company raised its quarterly dividend by 11.10% to 90 cents/share. This marked the 25th consecutive annual dividend increase for this dividend champion. Yield: 3.40% (analysis)

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. The company raised its quarterly dividend by 21.30% to 57 cents/share. This marked the 30th consecutive annual dividend increase for this dividend aristocrat. Yield: 2.65% (analysis)

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. The company raised its quarterly dividend by 13.30% to 85 cents/share. This marked the 17th consecutive annual dividend increase for this dividend achiever Yield: 1.70% (analysis)

W.W. Grainger, Inc. (GWW) engages in the distribution of maintenance, repair, and operating supplies, as well as other related products and services for businesses and institutions primarily in the United States and Canada. The company raised its quarterly dividend by 21.20% to 80 cents/share. This marked the 41 consecutive annual dividend increase for this dividend aristocrat. Yield: 1.50% (analysis)

Parker Hannifin Corporation (PH) manufactures fluid power systems, electromechanical controls, and related components worldwide. The company raised its quarterly dividend by 5.10% to 41 cents/share. This was the second dividend increase in a year. This dividend king has raised dividends for 55 years in a row. Yield: 1.90%

Sunoco Logistics Partners L.P. (SXL) engages in the transport, terminalling, and storage of crude oil and refined products in the United States. The partnership raised its quarterly distributions to 42.75 cents/unit. This dividend achiever has raised distributions for 10 years in a row. Yield: 4.40%

AmeriGas Partners, L.P.(APU), through its subsidiary, AmeriGas Propane, L.P., operates as a retail and wholesale distributor of propane gas in the United States. The partnership raised its quarterly distributions to 80 cents/unit. This dividend achiever has raised distributions for 8 years in a row. Yield: 8.10%

El Paso Pipeline Partners, L.P. (EPB) engages in the interstate storage and transportation of natural gas in the United States. The partnership raised its quarterly distributions to 89.50 cents/unit. El Paso Pipeline Partners has raised distributions for 5 years in a row. Yield: 5.90%

Magellan Midstream Partners, L.P. (MMP) engages in the transportation, storage, and distribution of petroleum products in the United States. The partnership raised its quarterly distributions to 84 cents/unit. This dividend achiever has raised distributions for 12 years in a row. Yield: 4.75%

Vanguard Natural Resources, LLC (VNR), through its subsidiaries, engages in the acquisition and development of oil and natural gas properties in the United States. The partnership raised its quarterly distributions to 59.25 cents/unit. Vanguard Natural Resources has raised distributions for 8 years in a row. Yield: 8.30%

EV Energy Partners, L.P. (EVEP) engages in the acquisition, development, and production of oil and natural gas properties in the United States. The partnership raised its quarterly distributions to76.40 cents/unit. EV Energy Partners has raised distributions for 6 years in a row. Yield: 4.80%

Exterran Partners, L.P. (EXLP) provides natural gas contract operations services to customers in the United States. The partnership raised its quarterly distributions to 49.75 cents/unit. Exterran Partners has raised distributions for 6 years in a row. Yield: 9.10%

Artesian Resources Corporation (ARTNA), through its subsidiaries, provides water, wastewater, and engineering services on the Delmarva Peninsula. The company raised its quarterly dividend to 19.78 cents/share. This
dividend achiever has raised distributions for 14 years in a row. Yield: 4.10%

Cullen/Frost Bankers, Inc. (CFR) operates as the holding company for The Frost National Bank that offers commercial and consumer banking, and other financial products and services primarily in Texas. The company raised its quarterly dividend by 4.30% to 48 cents/share. This marked the 19th consecutive annual dividend increase for this
dividend achiever. Yield: 3.25%

UGI Corporation (UGI), through its subsidiaries, distributes and markets energy products and related services in the United States and internationally. The company raised its quarterly dividend by 3.80% to 27 cents/share. This marked the 25th consecutive annual dividend increase for this dividend champion. Yield: 4%

Bar Harbor Bankshares (BHB) operates as the holding company for Bar Harbor Bank & Trust that provides various banking products and services to individuals, businesses, not-for-profit organizations, and municipalities primarily in Hancock, Washington, and Knox counties. The company raised its quarterly dividend to 29 cents/share. Bar Harbor Bankshares has boosted distributions for 9 consecutive years. Yield: 3.10%

Cracker Barrel Old Country Store, Inc. (CBRL), through its subsidiaries, engages in the development and operation of the Cracker Barrel Old Country Store restaurant and retail concept in the United States. The company raised its quarterly dividend by 60% to 40 cents/share. This marked the tenth consecutive annual dividend increase for Cracker Barrel. Yield: 2.80%

BOK Financial Corporation (BOKF), a financial holding company, offers a range of financial products and services to commercial and industrial customers, and other financial institutions and consumers. The company raised its quarterly dividend by 15.20% to 38 cents/share. This was the second dividend increase in a year. BOK Financial Corporation has raised dividends for 7 years in a row. Yield: 2.80%

Ameriprise Financial Inc. (AMP), through its subsidiaries, provides a range of financial products and services in the United States and internationally. The company raised its quarterly dividend by 25% to 35 cents/share. This marked the ninth consecutive annual dividend increase for Ameriprise Financial. Yield: 2.70%

Sensient Technologies Corporation (SXT) and its subsidiaries engage in the manufacture and sale of colors, flavors, and fragrances worldwide. The company raised its quarterly dividend by 4.80% to 22 cents/share. This marked the seventh consecutive annual dividend increase for Sensient Technologies. Yield: 2.30%

The Gorman-Rupp Company (GRC) designs, manufactures, and sells pumps and related fluid control equipment and systems worldwide. The company raised its quarterly dividend by 11.10% to 10 cents/share. This marked the 40th consecutive annual dividend increase for this dividend champion. Yield: 1.35%

Valmont Industries, Inc. (VMI) produces and sells fabricated metal products, pole and tower structures, and mechanized irrigation systems in the United States and internationally. The company raised its quarterly dividend by 25% to 22.50 cents/share. This marked the 12th consecutive annual dividend increase for this dividend achiever. Yield: 0.70%

Friday, April 27, 2012

Enterprise Products Partners L.P (EPD). provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the United States, Canada, and Gulf of Mexico. Enterprise Products Partners is the largest pipeline master limited partnership in the US. This dividend achiever has managed to boost distributions to unitholders for 15 years in a row.

Since it went public in 1998, the partnership has had the following objectives in mind:

1) Invest in growth opportunities to build or acquire energy infrastructure that will generate returns on investment grate than longterm cash cost of capital
2) Provide partners with periodic increases in cash distributions and an attractive total return on investment
3) Preserve financial flexibility and maintain an investment grade balance

Few companies have specifically set the goal to increase distributions to their owners. The partnership has done a great job in accomplishing these goals.

The MLP has managed to grow organically, as well as through strategic acquisitions. In 2009, it acquired Teppco Partners, which provided geographic and business diversity to its operations. In 2011, Enterprise Products also completed the acquisition of Duncan Energy Partners. The 2010 merger with Enterprise GP Holdings, essentially eliminated incentive distribution rights, which typically cap distribution growth in mature MLPs. It has managed to balance distributions growth with the retention of distributable cash flows. As a result of the elimination of incentive distribution rights in 2010, the partnership’s cost of capital has been substantially decreased. This is good news for unitholders, because it means that there will be less of a need for raising capital exclusively through stock unit issuance.

Besides through acquisitions, Enterprise Products Partners is going to grow its portfolio of fee generating assets through its massive capital expansion program. The partnership expects to invest $6.50 billion in capital projects between 2012 and 2014, half of which will be related to Eagle Ford shale projects. These projects include over 300 miles of natural gas pipelines, a 600 million cubic feet per day cryogenic natural gas processing plant, 127 miles of NGL pipelines and 140 miles of crude oil pipelines. In the fourth quarter of 2011, the partnership completed the $1.50 billion dollar Haynesville Extension of its Acadian natural gas pipeline system. This 270-mile natural gas pipeline will have the capacity to transport up to 1.8 Bcfd of production from the Haynesville/Bossier Shale to industrial and utility markets in South Louisiana and, through connections with other pipelines, to markets in the northeastern and southeastern United States.

The ten year annual distribution growth has been 7.60%/year. At this rate, distributions would double every decade. The partnership is not a taxable entity, which means that income, gains, losses and any deductions or credits flow through on the individual unitholders’ tax returns. In addition, a large portion of MLP distributions are tax deferred. For example, I held EPD units for about 7 months in 2011, and almost all of my distribution income was tax deferred. It decreased my basis in the partnership, which means that when I sell, I will have to pay higher taxes. In addition, once my basis falls to zero, all the business income would be taxable as an ordinary income. Capital gains or losses will be treated as capital income, not ordinary. Investors in Master Limited Partnerships typically receive a Schedule K-1 ( Form 1065), instead of a 1099-DIV. Although this has scared most new investors in MLP, most tax software and even enterprising do it your self investors can handle MLP taxes easily.

Since the partnership distributes a large portion of its cash flows to unitholders, dividend payout ratio is not a good metric for evaluating distribution sustainability. Instead, the Distributable Cash Flow (DCF) is a metric that is commonly used when evaluating distributions. Essentially DCF is calculated by adding certain non-cash items such as depreciation to net income, in addition to a few cash related items. The partnership has one of the best distribution coverages in comparison to other MLPs. In 2011 it had a distributable cash flow of $3.737 billion, and distributed $2.027 billion. Granted, this DCF included $1 billion in cash proceeds from sales of assets, but it still shows how the company more than comfortably can afford to pay and even increase its distributions to unitholders.

I have accumulated the majority of my position in the partnership in the low to mid $40’s/unit. At the current distribution rate, a 5% entry yield corresponds to a price of $50.20/unit, while a 6% entry yield translates into an entry price of $41.83/unit. I would be more inclined to add to my position on dips below $42 - $44/unit.

Wednesday, April 25, 2012

I have structured my portfolio in a way, that I receive regular dividend payments every month, quarter or year. My secondary objective is to generate at least market average total returns. As an investor, my goal is to generate solid total returns. I achieve this by selecting companies, which will grow earnings, thus afford to pay higher dividends over time and hopefully will be able to sell at higher market prices in the meantime. I do not worry much about what the tax rates will be in 2013, or over the next four decades. I only worry about selecting great companies.

This might sound like heresy for many investors, who are anxiously hearing about the expiration of the current preferential treatment of dividends in 2012. This could mean that dividends will be taxed as ordinary income, the same way that bonds are taxed today. This could bring a potential 43.60% tax rate on the highest income brackets, if taxes are increased as well.

First, few people are actually making a lot with dividends. Research I have uncovered shows that the average investor in their 60’s does not make more than a few thousand dollars in annual dividend income. For a retired individual, even if dividends are taxed as ordinary income, they would likely not end up paying that much more in taxes. Of course, if you are a highly compensated lawyer or a company executive officer, chances are that you will be paying that high tax rate. Although no one likes paying taxes, there are few options that investors can choose.

One such option is to put all your money in tax-deferred accounts like IRA’s or ROTH IRA’s. Most investors typically have a large portion of their net worth tied up in IRA’s or 401 (k) plans. Unfortunately, 401 (k) plans do not offer investors much flexibility in investment options beyond the traditional mutual funds. Utilizing Roth IRA’s would essentially shield investors from paying any taxes during their accumulation period, as well as during their distribution period, as long as they take earnings out after the age of 59 ½ years. In a previous article however, I discussed that there is a $5000 annual limit in saving for retirement in a tax deferred Roth IRA account. Because of this, serious dividend investors would likely have a small amount of their assets in tax deferred accounts.

Many investors also fear the fact that an increase in dividend tax rates would cause corporations to shift their focus from paying dividends to buying back stock. In my experience as a dividend investor, I would say that the companies that have had long histories of paying and even raising distributions to shareholders will continue to do so. After all, companies like Procter & Gamble (PG) or Coca-Cola (KO) have boosted dividends for over 5 decades, while paying dividends for at least one century. The past five decades have been characterized by top marginal taxes on dividends which have been much higher than the proposed tax increase. In addition, a large portion of the population does have balances in their 401 (k) retirement accounts however. These accounts are mostly invested in mutual funds, who these days own large stakes in America’s largest publicly traded companies. As a result, I do not expect many dividend growth companies to change their payment cultures overnight.

Another reason why investors should not be worried, at least not yet, is the fact that the proposed tax increase in the 2012 budget is not set in stone. The preferential treatment on dividends might still get extended for a few years. Back in 2010, the preferential treatment on dividends was extended for two years. As with most other important decisions, I expect that the outcome related to uncertainties behind dividend tax rates will be resolved in the last minute.

In addition, I do not pay much attention to taxes, because there is always a tradeoff involved. I could put all my money in tax deferred accounts, but I would have to wait until I am in my late 50s before I can withdraw income without paying any penalties. Placing my investments in taxable accounts exposes me to paying taxes on dividend and realized capital gains, but allows me the flexibility to withdraw and spend money as I please. I choose to select the best dividend stocks that will grow earnings, dividends and hopefully stock prices while I hold on to them. It is much easier to rely on dividend payments, rather than to worry about stock prices, in order to sell shares for income in retirement. Dividend payments are much less volatile in comparison with capital gains, and always represent a positive return on investment. Capital gains on the other hand are not income, until they have been realized by selling stock.

Taxes are just one aspect of the investment decision making matrix. In order to make the best decision, investors need to determine whether the company they are evaluating is attractively valued, has long term upside potential, and only after that should they worry about potential bite from dividend taxes. Worrying about taxes on dividend income, is akin to purchasing dividend paying stocks only based on yield. Investors will be much better off just starting their accumulation process in taxable or tax-deferred accounts, rather than waiting until all the uncertainties are over. After all, investing is all about embracing various risks, and having the plan to address or mitigate them through your retirement strategy.

Monday, April 23, 2012

My retirement strategy entails purchasing quality dividend growth stocks, which consistently raise distributions. It is very reassuring when I see that the companies I have purchased in my dividend portfolio increase dividends, and thus providing me with solid evidence that my research has been correct. Of the list of consistent dividend raisers from the past week, there were four in which I owned a position. On average, these stocks have delivered a 6.90% increase in distributions to me over the past year.

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company raised quarterly dividends by 7% to 56.20 cents/share. This dividend king has raised dividends for 56 years in a row. Yield: 3.40% (analysis)

Enterprise Products Partners L.P. (EPD) provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the United States, Canada, and Gulf of Mexico. This master limited partnership raised quarterly distributions to 62.75 cents/unit, which represented a 5% increase over the same rate this time in 2011. Enterprise Products Partners has raised distributions for 15 years in a row. Yield: 5% (analysis)

Kinder Morgan Energy Partners, L.P. (KMP) operates as a pipeline transportation and energy storage company in North America. This MLP raised quarterly distributions to $1.20/unit, which represented a 5.30% increase over the same rate this time in 2011. Kinder Morgan Energy Partners has raised distributions for 15 years in a row. Yield: 5.70% (analysis)

ONEOK Partners, L.P. (OKS) engages in the gathering, processing, storage, and transportation of natural gas in the United States. This MLP raised quarterly distributions to 63.50 cent/unit, which represented a 10.40% increase over the same rate this time in 2011. ONEOK Partners has raised distributions for 7 years in a row. Yield: 4.60%

Western Gas Partners, LP (WES) , together with its subsidiaries, engages in the acquisition, ownership, development, and operation of midstream energy assets in east and west Texas, the Rocky Mountains, and the Mid-Continent. This MLP raised quarterly distributions to 46 cent/unit, which represented a 17.90% increase over the same rate this time in 2011. Western Gas Partners has raised distributions for 5 years in a row. Yield: 4%

Spectra Energy Partners, LP, (SEP) through its subsidiaries, engages in the transportation of natural gas through interstate pipeline systems, and the storage of natural gas in underground facilities in the United States. This MLP raised quarterly distributions to 48 cent/unit, which represented a 4.30% increase over the same rate this time in 2011. Spectra Energy Partners has raised distributions for 5 years in a row. Yield: 6.10%

Crestwood Midstream Partners LP (CMLP) engages in gathering, compressing, treating, processing, and transporting natural gas primarily on the Barnett Shale formation of the Fort Worth Basin in north Texas. This MLP raised quarterly distributions to 50 cent/unit, which represented a 13.60% increase over the same rate this time in 2011. Crestwood Midstream Partners has raised distributions for 6 years in a row. Yield: 7.40%

Omega Healthcare Investors, Inc. (OHI) operates as a real estate investment trust (REIT) in the United States. The company raised quarterly distributions to 42 cents/share, which represented a 10.50% increase over the same rate this time in 2011. This dividend achiever has raised distributions for 10 years in a row. Yield: 8%

The Southern Company (SO) operates as an electric utility company. It is involved in the generation, transmission, and distribution of electricity through coal, nuclear, oil and gas, and hydro resources. The company raised quarterly dividends by 3.70% to 49 cents/share. This dividend achiever has raised dividends for 11 years in a row. Yield: 4.30%

PPG Industries, Inc. (PPG) manufactures and supplies protective and decorative coatings. The company raised quarterly dividends by 3.50% to 59 cents/share. This dividend aristocrat has raised dividends for 41years in a row. Yield: 2.30% (analysis)

Sonoco Products Company (SON) provides industrial and consumer packaging products, and packaging services worldwide. The company raised quarterly dividends by 3.30% to 30 cents/share. This dividend champion has raised dividends for 29 years in a row. Yield: 3.70%

People’s United Financial, Inc. (PBCT) operates as the bank holding company for People’s United Bank that provides commercial banking, retail and business banking, and wealth management services to individual, corporate, and municipal customers. The company raised quarterly dividends by 1.60% to 16 cents/share. This dividend achiever has raised dividends for 20 years in a row. Yield: 5.20%

The Travelers Companies, Inc. (TRV), through its subsidiaries, provides various commercial and personal property and casualty insurance products and services to businesses, government units, associations, and individuals primarily in the United States. The company raised quarterly dividends by 12.20% to 46 cents/share. The Travelers Companies has raised dividends for 8 years in a row. Yield: 2.90%

Somerset Hills Bancorp (SOMH) operates as the holding company for Somerset Hills Bank, which provides commercial banking products and services primarily in Somerset, Morris, and Union Counties of New Jersey. The company raised quarterly dividends by 14.10% to 8 cents/share. Somerset Hills Bancorp has raised dividends for 8 years in a row. Yield: 3.90%

Friday, April 20, 2012

Dividend growth stocks provide investors with a rising stream of passive income, which grows over time. The consistent nature of dividend increases protects the dividend income against inflation. However, many dividend growth stocks actually tend to deliver dividend growth which typically exceeds the rate of inflation. Historically, US stocks have managed to boost dividends above the rate of inflation by 2% – 3%.

There is typically a trade-off between dividend yield and dividend growth, that investors have to put up with. Generally, companies with the highest current yields tend to distribute most of their cash flows to shareholders, which leaves little room for investment in the business. This leads to low earnings growth, that trickles down into low dividend growth. Companies with low and medium sized yields however tend to disitrbute a low portion of their earnings to shareholders, with the rest reinvested in the business, thus providing fuel for future dividend increases.

There are a few companies which meet both criteria, when purchased at the right times:

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company expects to generate 10%- 12% annual growth in earnings through its cost reduction programs, acquiring companies internationally as well as innovating in growing markets in order to position itself favorably. Phillip Morris International will be able to keep increasing dividends at the high single digit percentage points in the foreseeable future, while paying an above average yield of 3.60% today. (analysis)

ONEOK, Inc. (OKE), a diversified energy company, engages in the gathering, processing, storage, and transportation of natural gas in the United States. The company operates through three segments: ONEOK Partners, Natural Gas Distribution, and Energy Services. The company enjoys strong performance in its ONEOK Partners (OKS) segment, which has resulted in increased distributions to ONEOK from the partnership. In addition, the company has been able to generate strong cash flow from its natural gas distribution segment. ONEOK indicated in September 2011 that it expects to increase its dividend 50 percent by 2014 and affirmed a long-term dividend payout target of 60 percent to 70 percent of recurring earnings, subject to board of directors' approval. ONEOK announced today it is considering increasing its July 2012 dividend above the 4-cent-increase it provided in September 2011. Yield: 3% (analysis)

Kinder Morgan, Inc. (KMI) owns and operates energy transportation and storage assets in the United States and Canada. The company operates in six segments: Products Pipelines-KMP, Natural Gas Pipelines—KMP, CO2—KMP, Terminals—KMP, Kinder Morgan Canada—KMP, and NGPL PipeCo LLC. The company expects its acquisition of El Paso to be completed by May 2012. This combination will lead to synergies and cost savings of approximately $350 million/year. As a result of this transaction and KMI’s normal expected annual growth, KMI still expects its dividend per share to grow at an average annual rate of around 12.5 percent through 2015 from its budgeted 2011 dividend per share of $1.16. The growth of KMI is being driven by Kinder Morgan Partners (KMP), which expects to declare cash distributions of $4.98 per unit for 2012, an 8 percent increase over the $4.61 per unit it will distribute for 2011. Yield: 3.30% (analysis)

Wednesday, April 18, 2012

In my four years as a dividend blogger, I have written hundreds of articles on dividend investing and weekly dividend increases. One common question that I receive from readers relates to companies raising distributions for a long period of time, yet their shares have a pretty low yield. It is obvious to long-term readers, which these comments come from visitors that have recently stumbled upon the idea of dividend investing, and therefore have plenty of reading to do before catching up.

In this article I will try to explain this common misconception. The first issue with the statement from the first paragraph is that companies cannot control the dividend yield on their shares. Companies can only influence the dollar amount of dividend payments, which leads to long streaks of consecutive dividend increases, provided that the underlying business model is sound and generates a high level of profits over time. After all, a company can only increase the numerator of the dividend yield equation, whereas the stock market is the one that determines the price of the stock at any given moment.

Investors cannot control the current dividend yield of a stock either. The main edge that dividend investors have over bond investors is the fact that dividend stocks provide the opportunity for increased distributions over time. As a result a stock investor who purchases $1000 worth of a stock yielding 2%-3% today will generate $20-$30 in annual dividend income today. If the stock keeps raising distributions and manages to double them in 10 years, the dividend income that the investor generates will double to $40-$60/year. If the stock price doubles in the process, the current yield would be 2%-3% for new investors. For the original investors however, their yield on cost, would be 4%-6%.

Let’s illustrate with a real-life example. Back in 1988 famous investor Warren Buffett began accumulating shares of Coca-Cola (KO), for his company Berkshire Hathaway (BRK.B). His split-adjusted average cost was $5.23/share. Back then the company paid a quarterly dividend of 3.75 cents/share (adjusted for three 2:1 stock splits in 1990, 1992 and 1996) for an annual distribution of 15 cents/share. The current yield was approximately 2.90%, which is the same as the dividend yield on Coca-Cola (KO) shares today. Investors who purchased Coca Cola at the end of 1988 would have paid $5.58/share, and would have expected 15 cents/share in dividend per year. Fast forward 24 years from that date and these investors would be enjoying a $1.88/share in annual dividend income. The current yield is still 2.69% for new investors. For the shrewd investors who purchased in 1988 however, the current dividend payment equates to a 33.69% yield on cost.

In fact, Coca-Cola stock yielded less than 2% for approximately 14 years after the purchase, yet the company managed to increase dividends every year. Many investors consider yield on cost to be a useless tool. It could be countered, that it is useless for the investors who lack the patience to make a purchase, and then quietly sit back and watch it pay higher dividends over time. The goal of every dividend investor should be to make an investment that pays them higher distributions in the future. Whether the yield on cost is truly a useless metric or not should be left to academicians and market theorists to decide. For ordinary dividend investors, the higher dividend checks received every quarter are sufficient positive reinforcement that their strategies are working correctly.

Monday, April 16, 2012

The list of dividend increases over the past week was dominated by Master Limited Partnerships. Most of the MLPs are pipeline companies, which are engaged in the transportation of oil and natural gas from the source to the final customer. Pipeline MLPs have shown a consistent growth in quarterly distributions as a group, despite the economic turbulence we have lived under over the past five years. This is mostly due to the fact that most pipelines are natural monopolies in a given area, and they typically manage to increase fees each year at least by the rate of inflation. In addition, while prices of the commodities they transport fluctuate on a daily basis, aggregate volumes of oil and gas in the US is pretty stable year over year.

Plains All American Pipeline, L.P. (PAA), through its subsidiaries, engages in the transportation, storage, terminalling, and marketing of crude oil, refined products, and liquid petroleum gas (LPG) products in the United States and Canada. The company operates in three segments: Transportation, Facilities, and Supply and Logistics. This dividend achiever raised quarterly distributions to $1.045/unit, which was 7.70% above the distribution paid in the same time in 2011. Plains All American Pipeline has increased distributions for 12years in a row. Yield: 5.30%

Genesis Energy, L.P. (GEL) operates in the midstream segment of the oil and gas industry in the Gulf Coast region of the United States. It operates through three divisions: Pipeline Transportation, Refinery Services, and Supply and Logistics. This MLP raised quarterly distributions to 45 cents/unit, which was 10.40% above the distribution paid in the same time in 2011. Genesis Energy has increased distributions for 9 years in a row. Yield: 5.80%

Targa Resources Partners LP (NGLS) provides midstream natural gas and natural gas liquid (NGL) services in the United States. The company operates in two divisions, Natural Gas Gathering and Processing, and Logistics and Marketing. This MLP raised quarterly distributions to 62.25 cents/unit, which was 11.70% above the distribution paid in the same time in 2011. Targa Resources Partners has increased distributions for 7 years in a row. Yield: 6.10%

Tanger Factory Outlet Centers, Inc. is a REIT, which engages in acquiring, developing, owning, operating, and managing factory outlet shopping centers. The company raised its quarterly dividend by 5% to 21 cents/share. This marked the 19th consecutive annual dividend increase for this dividend achiever. Yield: 2.90%

Healthcare Services Group, Inc. (HCSG), together with its subsidiaries, provides housekeeping, laundry, linen, facility maintenance, and dietary services to nursing homes, retirement complexes, rehabilitation centers, and hospitals in the United States. It operates in two segments, Housekeeping and Dietary. The company raised its quarterly dividend to 16.25 cents/share, which was 3.20% above the distribution paid in the same period in 2011. Healthcare Services Group has raised dividends for 10 years in row. Yield: 3.20%

While MLPs have been great performers over the past decade, several factors could bring a halt to their distribution growth. Since most MLPs distribute all of their cash flows to unitholders, the only way they could grow is by selling additional debt or units in the markets. If interest rates increase, this will increase the cost of capital for these companies, and will reduce investor appetite for the sector.

Friday, April 13, 2012

In a previous article, I discussed how dividend investors should analyze the earnings of each company they own in detail, in order to obtain an understanding behind the real valuation behind the business. I discussed how AT&T (T) and Coca-Cola (KO) appeared cheaper than usual. Today, I will discuss another example of a situation, where I had to dig deeper, before obtaining the full picture behind Abbott Lab’s valuation.

I have been a shareholder of Abbott Labs (ABT) for many years. Just like many other investors, I am cheerful about the announced split in two separate publicly traded companies, which will unlock shareholder value. I am also optimistic about the prospects of each of the separate divisions to continue increasing shareholder wealth by continuing the culture of boosting dividends. Abbott Labs is a dividend aristocrat, and has managed to boost distributions every year for 40 years in a row.

As I discussed earlier, I initiate or add to my positions in two or three dividend stocks every month. As part of my process of screening for attractively valued stocks each month, I noticed that a few good companies were not part of my buy listing. I was expecting to add to my existing position in Abbott within a few months. This inconsistency startled me, since in my recent analysis of the stock, I had concluded that it was still a great buy. I glanced at the company’s profile in Yahoo Finance and Google Finance, only to see that it was trading at 20 times earnings. Yahoo and Google Finance sites are currently showing $3 in earnings per share for the company. Given the current dividend payout of $2.04/share, this makes the payout ratio to be a very high at 68%. This is consistent with a public utility, but not with a dividend growth company such as Abbott Laboratories.

This made me further investigate the trends in quarterly earnings per share over the past year. I noticed that over the past five quarters, the trend in EPS looks something like this:

2011 Net Earnings Excluding Specified Items excludes after-tax charges of $1.4 billion, or $0.92 per share, related to litigation reserves (see Footnote 3 above), $75 million, or $0.05 per share, associated with the acquisition of Solvay Pharmaceuticals and $78 million, or $0.05 per share, for previously announced cost reduction initiatives and other. These items were partially offset by a favorable adjustment to tax expense of $51 million, or $0.03 per share, as a result of the resolution of various prior years' international and U.S. tax positions.

In my analysis of earnings and dividend payout ratios, I tend to focus on income from continuing operations. I exclude one-time events, in order to focus on recurring profits and normalize earnings per share. After reading this news release, investors would notice that these one time non cash charges accounted for 99 cents/share. By adding them to EPS from continuing operations of 19 cents/share, we come up with $1.18/share in actual earnings. This brings the total earnings per share for the past four quarters to $3.99/share. As a result of this adjustment, the price earnings multiple decreases from 20 to 15.

Wednesday, April 11, 2012

One of the biggest challenges that retirees face is inflation. Inflation decreases the purchasing power of the dollar every year. Over the past decade, inflation has averaged 2.40% per year, which has been slightly below the long-term average of 3% annually. Even if inflation were to continue to remain around 3% for the next few decades, this would affect the standard of living of retired investors over time. At a 3% annual inflation rate, the purchasing power of your income would be decreased by half in 24 years. As a result, investors relying on fixed income such as US Treasury bonds, would be faced with an income source which purchases less each year. In addition, given the low current yields on US Treasuries, investors these days have few options to invest for income besides dividend stocks.

A portfolio of carefully selected dividend stocks could provide investors with regular recurring dividend payments which have the potential to grow over time. Many investors tend to forget that dividend stocks represent partial ownership of real businesses. As inflation increases prices for goods and services, companies with strong pricing power tend to pass on price increases to consumers thus preserving and even increasing profits. Companies that tend to have strong pricing power, tend to have strong brand names and quality products which consumers desire and are willing to pay a premium price for. Consumers who prefer the taste of Pepsi will pay for the brand name product rather than generic cola or Coca-Cola and vice versa for consumers who like Coca Cola products. For example, I was able to purchase a 24 oz bottle of Coca Cola in 2003 for $1 at Wal-Mart, whereas today I would have to pay at least $1.50 today.

Another important factor when selecting companies for one’s income portfolio is whether the company has a history of consistent dividend increases that exceeds one decade. A company that generates so much in excess cash flows that manages to grow the business, while distributing higher amounts to shareholders in the form of dividends and share buybacks is a must hold for retirees who are living off dividends.

Five dividend stocks with strong brand names which have provided a rising stream of their shareholders for generations include:

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverages worldwide. The company has raised dividends for 50 years in a row. Over the past decade, the company has managed to boost distributions by 10.10% per year, handily beating the 2.40% annual inflation rate during this period. Yield: 2.80% (analysis)

PepsiCo, Inc. (PEP) engages in the manufacture, marketing, and sale of foods, snacks, and carbonated and non-carbonated beverages worldwide. The company has raised dividends for 40 years in a row. Over the past decade, the company has managed to boost distributions by 13.30% per year, handily beating the 2.40% annual inflation rate during this period. Yield: 3.10% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has raised dividends for 38 years in a row. Over the past decade, the company has managed to boost distributions by 17.90% per year, handily beating the 2.40% annual inflation rate during this period. Yield: 2.60% (analysis)

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company has raised dividends for 49 years in a row. Over the past decade, the company has managed to boost distributions by 12.40% per year, handily beating the 2.40% annual inflation rate during this period. Yield: 3.50% (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company has raised dividends for 55 years in a row. Over the past decade, the company has managed to boost distributions by 10.90% per year, handily beating the 2.40% annual inflation rate during this period.Yield: 3.10% (analysis)

Unilever PLC (UL) provides fast-moving consumer goods in Asia, Africa, Europe, and the Americas. The company has raised dividends for 49 years in a row. Over the past decade, the company has managed to boost distributions by 9.90% per year, handily beating the 2.40% annual inflation rate during this period.Yield: 3.70% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a foodservice retailer worldwide. The company has raised dividends for 35 years in a row. Over the past decade, the company has managed to boost distributions by 27.40% per year, handily beating the 2.40% annual inflation rate during this period.Yield: 2.80% (analysis)

Monday, April 9, 2012

In a previous article I discussed that I use S&P 500 as my benchmark for dividend returns and total returns. One of the drawbacks of this comparison is the fact that sometimes the composition of the index is out of sync with the composition of a typical dividend growth portfolio. For example, in the late 1990’s and early 2000’s, technology stocks which paid no dividends were added to S&P 500, which diluted the yield. In 2008 and 2009, a large portion of financial companies cut or eliminated distributions, months before the market started crashing. For example, Citigroup (C) cut its dividend in January 2008, while the market was still close to multi-year highs. As part of my strategy, I usually sell when a stock I hold cuts or eliminates distributions. However, using data from the S&P 500 as a proxy for the stock market, one can still draw valuable conclusions about dividend investing in general.

Recently, the stock market had its best quarter since the late 1990s. Currently, stocks are close to some of the highest levels since 2008. However, stock index investors have seen the value of their equities barely register any capital gains since 2000. At the same time, prices have oscillated wildly, falling from 1500 on the S&P 500 to less than 800 two times over the past twelve years. Investors who were relying on large-cap US stocks at the beginning of the new millennium, have depleted a large portion of their portfolios, as they sell stocks to pay expenses.

While prices have mostly remained flat, earnings and dividends have increased. Companies in the S&P 500 earned $48.17 and paid $16.69 in dividends in 1999. In 2011, companies in the S&P 500 earned $86.55 and paid $26.43 in dividends. As a result, As a result, the P/E ratio has decreased from 30.50 in 1999 to 14.50 in 2011. During the same time period, the dividend yield has increased from a paltry 1.14% to a slightly more respectable 2.10% in 2011. As mentioned previously, the reason for the low yield is the fact that not all companies pay dividends and the fact that several of the ones that do, distribute small amounts of earnings.

When you look at the annual returns since 2000, one could see that annual returns have ranged from a 26% increase in 2003 to a 38% decrease in 2008. One fact that illustrates the allure of dividends is that investors kept getting paid for holding on to their stocks. In fact, the reason why so many investors are increasingly embracing dividend investing is the fact that they are receiving a positive return on investment every year, no matter where the market goes. With the right selection criteria in mind, investors could easily designate a portfolio that provides a sufficient stream of dividend income to meet their expenses in any market environment, without having to sell shares.

A sample portfolio of 30 dividend growth securities, representative of the ten sectors that comprise S&P 500, which is built over time, could provide a very good entry yield in the range of 3% - 4%. In addition, this portfolio would likely generate higher dividend payments each year, as the companies in it raise distributions annually. A few starter companies fitting this purpose, which are also core holdings of many dividend growth investors include:

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. This dividend aristocrat has raised distributions for 40 years in a row. The ten year dividend growth rate is 8.70% per annum. Yield: 3.30% (analysis)

The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend king has raised distributions for 50 years in a row. The ten year dividend growth rate is 10.10% per annum. Yield: 2.80% (analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. This dividend achiever has raised distributions for 24 years in a row. The ten year dividend growth rate is 8.80% per annum. Yield: 3.10% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend aristocrat has raised distributions for 38 years in a row. The ten year dividend growth rate is 17.90% per annum. Yield: 2.50% (analysis)

AT&T Inc. (T), together with its subsidiaries, provides telecommunications services to consumers, businesses, and other providers worldwide. This dividend aristocrat has raised distributions for 28 years in a row. The ten year dividend growth rate is 5.30% per annum. Yield: 5.60% (analysis)

Intel Corporation (INTC) designs, manufactures, and sells integrated digital technology platforms primarily in the Asia-Pacific, the Americas, Europe, and Japan. The company has managed to boost distributions for eight consecutive years. Yield: 3% (analysis)

Friday, April 6, 2012

The McGraw-Hill Companies, Inc. (MHP) provides information services for the financial, education, commercial, and commodities markets worldwide. The company operates in four segments: Standard & Poor’s Ratings, S&P Capital IQ/S&P Indices, Commodities & Commercial, and McGraw-Hill Education. This dividend aristocrat has paid uninterrupted dividends on its common stock since 1937 and increased payments to common shareholders every for 39 consecutive years.

The company’s last dividend increase wasin January 2012 when the Board of Directors approved a 2% increase to 25.50 cents/share. McGraw-Hill ‘s largest competitors include Moody’s (MCO), Pearson (PSO) and Reed Elsevier (RUK).

Over the past decade this dividend growth stock has delivered an annualized total return of 6.10% to its shareholders.

The company has managed to deliver 7.10% in annual EPS growth since 2002. Analysts expect McGraw-Hill to earn $3.30 per share in 2012 and $3.64 per share in 2013. In comparison McGraw-Hill earned $2.75/share in 2011.

McGraw-Hill Companies will separate in two different companies by the end of 2012 – McGraw-Hill Financial and McGraw-Hill Education. This will allow each business to be more focused and will unlock value for shareholders in total. The Education division will be spun off through a tax-free distribution of shares to stockholders. The financial division is in talks with CME Group and Dow Jones to create a joint venture focusing on indexes – S&P/Dow Jones, in which MHP will have a 73% stake. New business ventures, as well as strategic acquisitions could bolster the bottom line in future years. In addition, as there is rising amount of savings in index funds and ETF’s, the company should benefit through the fees it charges for the underlying indexes.One of the major risks behind the Financial division is increased regulation from governments and governmental organizations throughout the world concerning the role of rating agencies and their operations.

I would find the Education business to be having better economics, as textbooks typically come up with newer editions very often, which leads to a consistent revenue stream for the publisher. In addition, I expect a higher rate of students enrolling in colleges, which should be good for business. As our society becomes more complex, the need for education increases, which should add to the bottom line of companies like MHP Education.

The company has managed to increase Return on Equity from 28.20% in 2002 to 45.20% in 2011. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 7.80% per year over the past decade, which is higher than to the growth in EPS.

An 8% growth in distributions translates into the dividend payment doubling almost every nine years. If we look at historical data, going as far back as 1989 we see that McGraw-Hill has managed to double its dividend every eleven and a half years on average.

The dividend payout ratio has mostly remained between 30% and 39% , with the exception of 2007. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently McGraw-Hill is fairly valued at 16.30 times earnings, has a sustainable dividend payout and yields 2.10%. I would consider adding to my position in the stock on dips below $40.

Wednesday, April 4, 2012

Back in September 2011, several dividend bloggers selected three of their most promising long-term picks in order to create a sample dividend growth portfolio. Unlike other stock competitions, the goal of this initiative was to identify the best picks from a long-term perspective, which are expected to be held for years.

Each blogger selected three stocks that they viewed as attractively priced. I selected McDonald’s (MCD), Chevron (CVX) and Enterprise Product Partners (EPD). You could read more about the reasoning behind these selections in this article.

McDonald’s Corporation (MCD) franchises and operates McDonald’s restaurants primarily in the United States, Europe, the Asia Pacific, the Middle East, and Africa. This dividend aristocrat has raised dividends for 35 years in a row. The ten year dividend growth rate is 27.40%/year. Analysts are expecting strong sales momentum from 2011 to continue, as consumers are attracted to the company’s menu. Yield: 2.90% (analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. This dividend achiever has raised distributions for 24 years in a row. The ten year dividend growth rate is 8.80%/year. High oil prices should benefit the Chevron, which has embarked on a multitude of new projects to uncover more reserves of the black gold. Yield: 3%(analysis)

Enterprise Products Partners L.P. (EPD) provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the United States, Canada, and Gulf of Mexico. The largest master limited partnership has raised distributions for 15 years in a row. Steep run-up in high-yielding stocks have pushed the yield to 5%. The ten year distribution growth rate is 7.60%/year. Enterprise Products Partners has raised distributions every quarter for the past 30 quarters, and made K-1 packages available to unitholders on its website. (analysis)

Monday, April 2, 2012

For a four straight year in a row, I participated in a friendly stock picking competition. The four stock picks that I selected have been chosen as if I was choosing long-term investments. As a dividend investor, my holding period is essentially forever, until one of these three events occurs. All of the stock picks I selected make great long term investments, because they represent companies that have strong brand names, strong competitive advantages and have plenty of growth opportunities ahead of them. This enables them to record increasing earnings every year, which then trickles down into dividend hikes every year for the loyal shareholders.

The four companies I chose were the same ones as the 2011 selections:

PepsiCo, Inc. (PEP) engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products, and other foods worldwide. It operates in four divisions: PepsiCo Americas Foods, PepsiCo Americas Beverages, PepsiCo Europe; and PepsiCo Asia, Middle East, and Africa. This dividend aristocrat has rewarded shareholders with dividend hikes for 39 consecutive years. The ten year dividend growth rate is 13.30%.year and the current yield is 3.10%. (analysis)

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has raised distributions each year since the spin off from Altria Group (MO) in 2008. Yield: 3.60% (analysis)

Johnson & Johnson (JNJ) engages in the research, development, manufacture, and sale of various products in the health care field worldwide. This dependable dividend aristocrat has raised distributions for 49 consecutive years. The ten year dividend growth rate is 12.40%.year and the current yield is 3.50%. (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. This dividend king has raised distributions for 55 years in a row, which has only been accomplished by only eleven companies worldwide. The ten year dividend growth rate is 10.90%.year and the current yield is 3.10%. (analysis)

My picks have managed to match or outperform S&P 500 in every year of the competition. This is mostly due to the fact that the past has been a turbulent time for stock investors in general. Dividend investing is a slow and steady approach, which might lag during rapid increases in stock prices but would provide a steady cushion during flat or declining markets. To most dividend investors however stock prices are of secondary importance. When one is living off dividends, all they are interested in is the sustainability and growth of the dividend income stream generated from their portfolios. The four steady eddies above have managed to boost distributions by 10.50% on average over the past 12 months. The average yield on all four is 3.30%.

Investors who plan on living off dividends in retirement should own at least 30 individual securities, in order to have adequate diversification of their portfolios.

Disclaimer

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